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DIIS WORKING PAPER 2019: 2

CAN THE SDGS IN LOW-INCOME

COUNTRIES BE FINANCED?

AND SHOULD WE CARE?

Ole Winckler Andersen and Ole Therkildsen

CAN THE SDGS IN LOW-INCOME

COUNTRIES BE FINANCED?

AND SHOULD WE CARE?

Ole Winckler Andersen and Ole Therkildsen

Acknowledgements

We would like to thank Thomas Juel Thomsen, who contributed to the initial

discussions of this paper. We also acknowledge numerous valuable comments

from colleagues at DIIS on an earlier draft version of this paper.

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Ole Winckler Andersen

Senior Analyst

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Ole Therkildsen

Emeritus Researcher

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CAN THE SDGS IN LOW-INCOME COUNTRIES BE FINANCED? AND SHOULD WE CARE?

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DIIS WORKING PAPER 2019: 2 1

TABLE OF CONTENTS

Introduction 2

A critical assessment of the SDG cost estimates 4

Estimation challenges 4

Findings 6

A critical assessment of estimates of SDG financing sources 8

Estimation challenges 8

Findings 8

Policy implications of the underfinancing of the SDGs 12

Conclusions 15

References 17


INTRODUCTION

The answer to the first question in the title of this paper is no. The answer to the

second question is yes. This reflects concerns about the realism of reaching the

Sustainable Development Goals (SDGs) in Low-Income Countries (LICs)1. The

SDG agenda is a desirable vision – not a strategy for reaching the goals.

As shown in this paper, the financing gap for the SDGs in most developing

countries and especially in LICs will be significant. This contrasts with the

optimism at the Financing for Development Conference in Addis Ababa in July

2015 and the UN General Assembly in September 2015, where the SDGs were

adopted. In preparation for these meetings, several cost estimates were produced

for achieving the SDGs. The results varied a great deal and led to discussions of

alternative estimation approaches. That the required financing for most

developing countries – certainly for all LICs – could be unrealistically high was

not much discussed.

LICs have different financing needs, opportunities and challenges than other

developing countries, but the significant and increasing variation among the LICs

should be born in mind (see e.g. Alonso, Cortez and Klasen, 2014). However,

while there are many references to LICs (and to Least Developed Countries) in the

Addis Ababa Action Agenda (United Nations, 2015), the specific financing

challenges facing LICs were not dealt with in detail. This paper discusses these

challenges. It has three purposes.

The first is to assess the reliability of the cost estimates for the SDGs in LICs and

the related financing needs. This shows that significant uncertainty is associated

with the existing SDG cost estimates especially for LICs. A key challenge is to

estimate the costs of the fundamental changes which the achievement of the SDGs

will require. Other challenges are to ensure that cost estimates reflect the economic

effects of financing the SDGs in LICs and that the LICs may not have the

administrative capacity to effectively and efficiently absorb investments of the

magnitude envisaged by the SDGs2. Despite these challenges, all analysts agree

that the SDG financing needs in LICs are substantial and that the additional costs

will be a significant share of their GDP, but with some variation between the

individual LICs.

The second purpose is to review the realism of the estimates of potential financing

sources for the SDGs in LICs. It shows, based on recent developments in both

private and public development finance, that the SDGs in LICs will be grossly

underfunded due to i.e. slower than expected economic growth, decreasing

1 For 2019, the World Bank has classified 34 countries as low-income countries (LICs) (GNI per capita of

USD 995 or less in 2017) and 47 countries as lower middle-income countries (LMICs) (GNI per capita

between USD 995 and 3,895 in 2017). As described in various analyses, there is significant overlap

between the groups of LICs and least developed countries (LDCs), which is the classification used by the

United Nations. 47 countries were classified as LDCs as of December 2018. Data are sometimes provided

for LICs and sometimes for LDCs, and we will in the following use data for both groups of developing

countries. 2 The implementation of the MDGs also faced significant capacity problems (Therkildsen, 2005).


international private investments, a low and decreasing share of provided official

development assistance and a weak tax base, which makes it difficult to ensure

significant increases in domestic resource mobilization. Financing this gap

through loans can be a risky strategy, but an increasing number of LICs have

increased their debt to levels which may not be sustainable3. However, access to

finance is not the only challenge for LICs’ efforts to achieve the SDGs. Conducive

policy frameworks will be important, and a critical issue will be to ensure that

access to finance is translated into results that contribute to the SDGs.

The third purpose is to discuss the importance and potential policy implications of

these main findings. The political aspects of the implementation of the SDG

agenda have attracted less attention in the discussions so far. However, given that

LICs may not be able to mobilize enough funding to achieve the SDGs, both LICs

and donor countries will have to consider their respective policies and strategies.

To the extent that the SDGs influence domestic policies and strategies, the LICs

will face difficult trade-offs between individual SDGs. How LICs deal with these

trade-offs will be determined not only by domestic politics but also by the relation

to international actors4. For donors, it may imply a need for better targeting of

development assistance, including mobilized private finance, to LICs and

probably also to specific sectors and activities. Moreover, donor efforts should

reflect the policy response of LICs to the SDGs and their insufficient financing. The

paper concludes by arguing that it may be politically difficult to start discussions

of the substantial underfinancing just a few years after the adoption of the SDGs,

but without radical change in available funding both LICs and donor countries

will have to face up to decisions on which SDGs to prioritize and which to neglect.

The method used in this paper is straightforward. The paper provides no new

estimates of SDG costs or financing. Instead, analyses of SDG costs are based on a

review of often quoted estimates, while the analyses of financing needs rely on

recent work by international institutions such as the OECD, the World Bank and

the UN. In the analysis of the potential policy implications of the underfunding of

the SDGs, a distinction is made between the international and national levels as

well as between donors and developing countries. As a framework for

understanding the political economy of SDG funding and implementation at

country level, a political settlement perspective5 is suggested and briefly

introduced.

In addition to this introduction, the paper consists of four sections. Section 2

focuses on estimates of SDG costs and discusses the relevance of applied

estimation approaches for the estimation of the SDG costs in LICs. In section 3,

estimates of the role of various financing sources in LICs are reviewed. Section 4

discusses some potential policy implications of the SDG cost and financing

estimates for both LICs and donors. Section 5 concludes the paper.

3 IMF, 2018; Mustapha and Prizzon, 2018. 4 In addition to the focus on the SDGs and development finance, the role the SDGs may play in

international governance has led to discussion (see e.g. Kanie and Biermann (eds.), 2017). This discussion

will not be dealt with in this paper. 5 For an introduction see Behuria, Buur and Gray, 2017.


A CRITICAL ASSESSMENT OF THE SDG COST ESTIMATES 6

As mentioned, several estimates exist of the costs of the SDGs. This section

identifies five specific estimation challenges, which are particularly critical for the

estimation of the SDG costs in LICs. This is followed by a review of some often-

quoted estimates of the SDG costs in developing countries. Despite these estimates

being associated with significant uncertainty, it is concluded that the SDG costs in

developing countries will be substantial, especially as a share of GDP in LICs.

Estimation challenges

Current discussions of financing the SDGs rely to a large degree on estimates

produced before the adoption of the SDGs in 2015 despite their, often, preliminary

character. Moreover, it is generally difficult to compare the estimates, as they are

not based on the same assumptions. Estimating the SDG costs of LICs involves

specific, but difficult challenges. At least five general estimation challenges have

specific implications for the estimation of financing needs in LICs, namely (i) the

cost implications of specific interactions between the SDGs; (ii) a need for more

fundamental changes to reach the SDGs; (iii) the existence of stronger economic

effects due to the required significant increase in development finance; (iv)

insufficient administrative capacity; (v) specific challenges related to climate

change and adaptation. Each is discussed in turn.

First, the individual SDGs are not well-defined cost areas, and the SDGs are not

mutually exclusive. Thus, there are significant interactions between the goals7,

which lead to potential overlaps between individual cost areas and a risk of

double counting (Schmidt-Traub, 2015, p. 27). Financing one area or goal will

often have implications for other goals, and overall estimates should,

consequently, not be made just by aggregating sector needs. An example is that

investments in infrastructure (roads, energy, water and sanitation) are a

prerequisite for achieving other SDGs (United Nations, 2018, p. 15). Another, often

mentioned example, is the synergy between water and health, but there will also

be trade-offs which can both be within and between sectors8. A main challenge is

how to assess the cost implications of these synergies and trade-offs as well as

various cross-cutting issues (poverty reduction, inequality, gender, etc.), which

6 This paper uses ‘costs’ instead of ‘investments’ (compare with Schmidt-Traub, 2015, p. 12) in order to

signal the importance of including operation and maintenance costs in estimations of the costs of the

SDGs. For a brief discussion of the use of the concept of ‘costs’, see also UNTT (2013, p. 3). The

importance of considering the operation and maintenance costs of the SDG is emphasized in recent

reports, e.g. United Nations (2018). Neglect of this issue was also a major problem for the MDGs

(Therkildsen, 2010; Therkildsen and Buur, 2010). In general, it is difficult to compare various estimates as

they rely on different cost and financing concepts (e.g. costs, investments, additional costs, financing

needs, etc.). 7 See International Council for Science (2017), which contains a systematic analysis of the interactions

between the individual SDGs. See also Le Blanc (2015) and the discussion in OECD (2018c). 8 See e.g. Kenny (2018, pp. 19-20) for examples.


will have to be dealt with directly and indirectly in most of the cost areas

(Schmidt-Traub, 2015, pp. 29-32)9.

The fact that these synergies and trade-offs may vary between countries – together

with differences in the ways in which the SDGs can be achieved due to differences

in local contexts – has not led to any systematic attempts to consider if specific

overlaps and interactions between the individual SDGs are present in developing

countries or in LICs. Moreover, there are very few attempts to try to operationalize

the interlinkages between the goals. A better understanding is therefore needed of

how the various goals are interrelated in developing countries – especially in LICs.

Such an understanding, which would have implications for estimates of costs and

financing, could also include issues like sequencing of activities and design of

coordinating policies (Kenny, 2018), and how to ensure that the allocation of

investments both between and within sectors reflects the absorption capacity of

the implementing organizations (UNCTAD, 2014, p. xi). This recognition of

heterogeneity between countries has been presented as an argument for using

national instead of international needs assessments as the basis for SDG cost

estimates (UNTT, 2013; Schmidt-Traub, 2015).

Second, cost estimates depend on assumptions about SDG implementation

strategies and ‘production functions’ (Schmidt-Traub, 2015) across sectors and

countries. In several areas, new ‘production functions’ may have to be developed;

e.g. to make the production more sustainable (energy and electrification are an

example), and to introduce new technology; e.g. in the education sector (Kenny

and Snyder, 2017, p. 2)10 or in the health sector (Schmidt-Traub, 2015, p. 47). It has

been argued that without technological change the SDGs will not be achieved

(Kenny and Patel, 2017, p. 1)11, and change is especially relevant for LICs, which

are more distant from achieving the goals. Obviously, such changes are difficult to

predict and therefore difficult to address in budget estimates in the medium and

long term, but simple extrapolations based on average unit costs of the past are

clearly problematic.

Several other factors may influence ‘production functions’ and the costs of the

SDGs. Per capita costs may increase in some countries, if – due to the commitment

of ‘leaving no one behind’ – the goal is to have (close to) 100 percent coverage12.

The reason is that it may be costlier to reach marginal groups (Schmidt-Traub

(2015, p. 40). Another issue is that starting points differ, which leads to additional

costs in some countries. Road infrastructure is an obvious example, but it may also

be an issue in other sectors. Such infrastructure costs are often calculated as a

percentage of GDP (Schmidt-Traub, 2015, p. 66), which can lead to significant

estimation errors. More specific assessments of the needs are therefore required.

9 See also the discussion on cross-cutting issues in United Nations (2018, p. 2), which mentions the

implications of gender equality as an example. 10 See e.g. International Commission on Financing Global Education (2016, p. 18.) 11 Kenny and Patel (2017, pp. 2-3) use both a broad and a partial definition of ’technology’. The key role of

new technologies is also mentioned in United Nations (2018). 12 In practice, the coverage will not be 100 percent and estimates often assume a lower coverage (see e.g.

Stenberg et al., 2017).


Third, there may be economy-wider effects of financing the SDGs. Significantly

increased investments (and increased operation and maintenance costs) will

influence economic categories like wages, exchange rates and prices as well as

more dynamic effects13. For instance, there will be a mutual relationship between

economic growth and many of the SDGs. As the envisaged increase in investments

is higher in the developing countries, it might be expected that these effects would

be stronger there, but only few analyses have dealt with these effects of financing

the SDGs. An analysis mentions some main characteristics of the LICs and

discusses how these can influence the feasibility of financing the SDGs. It

concludes that the available fiscal space will not be sufficient in these countries

(Baum et al., 2017)14.

Fourth, as mentioned earlier, cost estimates also depend on the administrative

capacity to absorb increasing inflows of financing – including aid. Analyses have

focused on developing countries’ ability to effectively and efficiently turning

inputs into outputs and have mentioned supply constraints and diminishing

returns to scale, which will have significant implications for the ‘production

functions’. Analyses have questioned the degree to which developing countries

have the institutional structures in place to ensure efficient public investments and

have also indicated that this issue could be more pronounced in LICs (Gupta et al.,

2014)15 with implications for the SDG cost estimates. Whether volatility in these

investments can impact on their efficiency could be an additional issue (see

Museru et al., 2014).

Fifth, the costs of climate change mitigation and adaption may lead to major

challenges for developing countries – the LICs in particular – and estimates may

“understate the true needs” (Schmidt-Traub, 2015, p. 7; see also pp. 37-38).

Especially in the LICs, comprehensive efforts are needed both to address climate

adaptation, but also to transform production and consumption patterns to avoid

just reproducing the unsustainable production and consumption patterns of

developed countries. The magnitude of these challenges in the LICs will also

depend on the behavior of developed countries. The costs of the needed

transformative changes will therefore be difficult to estimate.

Findings

As the SDGs are universal and more ambitious than the MDGs, the costs of the

SDGs cannot be compared to the costs of the MDGs. Therefore, it is not possible,

when estimating the SDG costs, to rely on estimates for the MDGs.

While the cost estimates for the MDGs were in the range of USD 20-200 billion

(UNTT, 2013, p. 7), but vary a great deal, the estimated costs of the SDGs are in

trillions of USD. An often-cited estimate is from UNCTAD (2014). It estimates –

based on a review of various analyses – that total global investment16 needs will be

13 Mongardini and Samake (2009). See also Schmidt-Traub (2015). 14 See also Shen et al. (2015). 15 Compare also with IMF (2016a) and IMF (2016b). 16 As UNCTAD’s estimate is based on analyses which to varying degrees include operation and

maintenance costs, ‘investments’ is used here instead of ‘costs’.


USD 5-7 trillion annually. The figure for developing countries17 is USD 3.3-4.5

trillion annually. With present annual spending in these countries being around

USD 1.4 trillion, this implies an annual financing gap of USD 1.9-3.1 trillion

(UNCTAD, 2014, p. xi). This seems to be the preferred figure by several

organizations, including the OECD, which often refers to an annual financing gap

of approximately USD 2.0 trillion in developing countries. UNCTAD (2014, pp.

146-47) does not provide an estimate for SDG financing needs in LICs, but in

LDCs where it is estimated that total investment needs will start at an annual USD

120 billion increasing to USD 240 billion in 2030. UNCTAD provides various

financing scenarios based on this investment estimate as well as on alternative

assumptions of private sector investments in SDGs in LDCs. The scenarios show

that even under the assumption of continued growth in the private sector share of

the SDG investments in LDCs, their annual public investments, including Official

Development Assistance (ODA), will have to increase between 3 and 9 times

compared to the level of public investments in 2013 (UNCTAD, 2014, pp. 146-147).

Another estimate is from Schmidt-Traub (2015), who critically reviews several

previous analyses, including many of the analyses used by UNCTAD (2014). He

shows that there are significant variations in the assessment approaches used and

in their quality. His estimate indicates that the SDGs will require average

additional costs in LICs of USD 343-360 billion annually18 and in lower middle-

income countries (LMICs) of USD 900-944 billion annually in 2015-2030. Together,

the estimated total additional costs in LICs and LMICs are approximately USD 1.4

trillion annually. This estimate comprises costs for eight investment areas as well

as for climate mitigation and adaptation (Schmidt-Traub, 2015, p. 10), but does not

cover the total costs19. According to this estimate, public budgets will have to be

increased by up to 30 percent of GDP annually (Schmidt-Traub, 2015, p. 107) in

LICs compared to ‘only’ 5-6 percent in LMICs20.

Thus, differences between the various existing cost and financing estimates are

significant, but comparisons are difficult due to differences in estimation

approaches. The overall tendencies are, however, that estimates of the SDG costs

imply that in all sectors significant additional expenses are required measured as a

share of GDP – especially in LICs.

17 See UNCTAD (2014) for country groups used in the report. 18 A recent IMF Study estimates that additional USD 0.5 trillion will be needed in 2030 for five key SDG

areas (Gaspar et al., 2019) or on average 15 percentage points of GDP in LICs. Further, the study

estimates that countries could benefit as much from public sector efficiency gains as from tax reforms. 19 See Schmidt-Traub (2015, p. 9 footnote 1). See also p. 101 and p. 108, where several caveats are

mentioned. 20 This obviously depends on growth assumptions, and lower than expected economic growth will require

that these estimates be revised accordingly.


A CRITICAL ASSESSMENT OF ESTIMATES OF SDG FINANCING

SOURCES

How will the substantial SDG financing gap be financed? The Addis Ababa Action

Agenda of 2015 (United Nations, 2015) stressed that all financing sources (public,

private and blended finance) should be mobilized, but it did not state in any detail

which role the different sources should play or how the role of individual

financing sources could vary between sectors and between different groups of

countries, including LICs. This is the focus of this section, where the overall

finding is that funding is not forthcoming as expected in 2015. Consequently, the

SDGs will be grossly underfunded, and the poorest developing countries face

particular challenges.

Estimation challenges

Obviously, analyses of potential SDG financing sources in developing countries

are based on assumptions about the future composition of sources of finance at

both national and sector level. A critical assumption is that the composition of

SDG financing in developing countries will gradually reflect the composition of

finance in developed countries. It has, for example, been estimated that more than

50 percent of the financing resources in LICs could come from public finance with

the implication that the other half of the SDG costs would be covered by private

finance, but with significant variation between sectors (Schmidt-Traub, 2015).

Furthermore, analyses have used the same share of private finance in LICs and in

LMICs (Schmidt-Traub, 2015), which implies the same private sector interest in

the two groups of countries and would require significant growth in private

investments. Finally, it seems – at least implicitly – to be assumed that the

composition of development finance at sector level would be like the composition

in developed countries. This, despite the fact that the present composition of

finance in developing countries differs from that of developed countries in several

sectors. For developing countries, it is estimated that 70 percent of infrastructure

costs are presently funded by the public sector, while the opposite is the case for

developed countries. There are, however, significant differences between sectors,

and e.g. energy and transportation are mostly publicly funded in many

developing countries, in contrast to several developed countries (United Nations,

2017, p. 12). On the other hand, in the education sector the present share of private

finance is estimated to be around 20-30 percent, which is higher than in developed

countries (Schmidt-Traub, 2015, p. 50). Such assumptions are problematic and,

obviously, they will affect not only the analytical results but potentially also policy

making in developing countries.

Findings

The various estimates of SDG financing are based on GDP growth assumptions,

and a critical element is, how the international economy develops. Analyses have

concluded (see e.g. United Nations, 2018) that prospects for LICs are less positive

than a few years ago. Many poor countries have low or negative per capita

growth. A recent analysis estimates the growth rate in LICs in 2018 to be 5.6


percent, but with significant variations between countries, and only with a slight

increase in following years (World Bank, 2019). Thus, prospects for the coming

years indicate increased growth, but under the SDG growth target of 7 percent

(United Nations, 2018, p. 9).

The important role of (especially foreign) private finance as a source of SDG

finance was emphasized in the Addis Ababa Action Agenda (United Nations,

2015, paragraphs 35-49), while domestic private finance is mentioned in more

general terms or in connection with insufficient access to financial services

(paragraphs 38-39). Thus, a distinction between various forms of domestic private

finance was not made. Nevertheless, there is an increasing recognition of the

potential role of domestic pension funds. A recent report also highlighted user

investments and charges as financing sources for operation and maintenance

costs, although this may have equity implications (United Nations, 2018).

International private investments have, however, shown a declining trend and

have largely target-specific sectors. They constitute at present only approximately

5 percent of GDP in LICs and about a third of government revenues (OECD,

2018b). As the investment needs for SDGs are huge, private finance will have to

increase very significantly in order to cover the above-mentioned share of close to

50 percent.

Due to a higher risk of investing in the poorest developing countries, blended

finance was seen as a particularly important instrument and a way to improve

risk-return profiles. A recent report concludes, however, that the amount of funds

mobilized by blending is low, and from 2012 to 2015, only 7 percent were for

LDCs (UNCDF, 2018)21. There are various reasons for this, including a lack of

bankable projects, small economies, weak institutional frameworks and enabling

environments, etc. This clearly indicates that it is difficult for LICs to attract

private finance, including blended finance (OECD, 2018a).

Analyses have also shown that the sector distribution of private development

finance is focused on a few sectors. International private investments, including

mobilized private finance, mostly target industry, mining, construction, energy,

banking and business. Other sectors, including the social sectors (education and

health)22, have mobilized a limited amount of private development finance

(UNCDF, 2018; OECD, 2018c), which implies that the financing needs of these

other sectors will have to be covered by other financing sources, including the

public sector and ODA.

Remittances were at a very high level in 2017 (USD 466 billion (OECD 2018b))

with an increasing trend over several years, but this is also the only source of

development finance which has grown significantly. Only a minor share of the

21 There seems, however, to be a slightly increasing trend in mobilized private finance by blending

(UNCDF, 2018). 22 If full coverage of health and education services is the goal, it may be assumed to become increasingly

difficult to rely on private funding as more marginalized groups will have to be covered. Although there

has been some progress in private investments in infrastructure in developing countries, this development

has only to a limited extent comprised LICs (see United Nations, 2017, p. 14).


remittances – 4-5 percent or USD 17 billion – is, however, going to LICs (OECD,

2018b).

The important role of domestic public financial resources in financing the SDGs

was also emphasized in the Addis Ababa Action Agenda (United Nations, 2015,

paragraphs 20-34), where various areas were mentioned such as improved tax

systems, more efficient tax collection (paragraph 22), reduced illicit financial flows

(paragraph 23), and prevention of corruption (paragraph 25). The need for

improved domestic resource mobilization has been reiterated in several reports

after the meeting in Addis Ababa (see e.g. United Nations, 2018). Tax revenues in

LICs have increased in the last decade, but at a very moderate pace, and as shown

in various analyses improvements in tax systems are especially difficult to achieve

in LICs (e.g. Moore and Prichard, 2017), where taxes on average constitute only 15

percent of GDP compared to around 25 percent in LMICs. To this can be added

that the present tax systems in LICs may be regressive implying that, without tax

reforms, increased taxes may have undesirable distributional implications (Lustig,

2017). However, a significant increase, e.g. up to 20 percent of GDP, which might

be difficult to achieve, would only provide around additional USD 60-70 billion

annually23.

Other elements of public financing comprise ODA and debt financing. Trends in

aid flows are not encouraging either. ODA has been rather constant in recent years

(0.31 percent of GNI in 2017) and is thus far below commitments. In addition, over

the last decade, a decreasing share has gone to LICs (and LDCs) although with a

slight reversal in 2017 (OECD, 2018a; OECD, 2018b)24. This has been followed by

an apparent decrease in support for policy and institutional reforms (OECD,

2018c), which is critical for the poorest developing countries with often less

capacity and weaker institutional structures. The present level of ODA from

members of the OECD’s Development Assistance Committee is around USD 150

billion annually25, much less than needed to close the financing gap in developing

countries26. An unrealistic doubling of ODA would only cover approximately 10

percent of the financing gap, using the above estimate by Schmidt-Traub (2015) as

a reference. For the LICs, receiving a low and decreasing share of the provided

ODA in the last decade, the situation is even more critical. The LICs receive

around USD 25 billion annually in ODA. Assuming a financing gap of USD 350

billion in LICs, an ODA doubling would therefore cover significantly less than 10

percent of the gap.

The fact that several developing countries have difficulties in financing their

development with own resources is illustrated by increasing debt levels in recent

years to levels which may not be sustainable (IMF, 2018; Mustapha and Prizzon,

23 For a similar rough calculation, see Plant (2018). The central role of domestic resource mobilization is

also highlighted in target 17.1 of the SDGs, which focuses on strengthening domestic resource

mobilization. 24 In 2016, ODA to LCDs constituted 0.09 percent of gross national income in donor countries compared to

the target of 0.15-0.20 percent. 25 This constitutes 4-5 percent of GDP in these countries. 26 Development assistance provided by emerging donors and through South-South co-operation is

growing but still constitutes a relatively small amount.


2018). The government debt in LICs as a ratio of GDP increased by more than 20

percentage points from 2013 to 2017 and was over 50 percent in 2017 (World Bank,

2019), and financing the SDGs with loans is not a realistic option. To this can be

added that the composition of the debt has changed. An increasing share is on

non-concessional terms and in foreign currency, resulting in higher risks (World

Bank, 2018).


POLICY IMPLICATIONS OF THE UNDERFINANCING OF THE SDGS

The evidence of substantial underfinancing of the SDGs – especially in LICs – is

compelling despite inevitable uncertainties about the future and justified

questions about the assumptions behind the estimates. The fact that the degree of

underfunding varies – not only between developing countries, but also between

sectors – further complicates assessments of the (potential) policy implications of

these trends. One thing is certain, however: some SDGs will in practice receive

much more political support than others. The implication is that domestic politics

in developing countries will be especially influential in determining the outcomes

as illustrated in the following brief political economy analyses.

First, the discussions of the SDGs and potential funding have primarily taken

place at international level, whereas the influence of the adopted SDGs on various

actors’ priorities in LICs is, at best, unclear and have not been thoroughly

analyzed. Developing countries may officially have embraced the whole SDG

package in the hope that it would increase aid funding. Such support is typically

expressed in the relevant international SDG fora only – without being an

important part of the domestic public debate. How well known the SDGs are, and

the degree of ‘ownership’ that individual LIC-based actors feel for the goals has

not yet been systematically analyzed27. If SDGs are mostly known in small

development circles, they may not have the expected influence on domestic policy

making (Kharas and Rogerson, 2017, p. 19).

The underfunding of the SDGs, assuming there is no radical change in available

development finance for the SDGs, may at some point lead to international

discussions of whether and how to adapt the SDG agenda to available funding28.

A step in that direction has been taken by requesting transparent and systematic

monitoring of the implementation of the SDGs and of current revisions of both

cost and financing estimates. Monitoring is done by the Inter-Agency Task Force

on Financing for Development (United Nations, 2016; United Nations, 2017;

United Nations, 2018), but has so far not resulted in new estimates and financing

plans.

Another recurrent recommendation is to develop national SDG strategies and

financing frameworks as recommended in the Addis Ababa Action Agenda

(United Nations, 2015) and reiterated in a recent UN report (United Nations, 2018,

p. 1). It will, however, be a challenge how the uncertainty related to the costs and

financing of the SDG should be addressed in planning and budgeting processes in

developing countries (Kenny and Snyder, 2017, p. 16)29.

27 Tracking East African newspapers from August to November 2018 shows that articles on SDGs are

rather few. A brief review of African government websites found only a limited number of references to

the SDGs. For a review of how African countries score on the different SDGs, see The Sustainable

Development Goals Center for Africa and Sustainable Development Solutions Network (2018). 28 See e.g. UNESCO (2017, 12): “... the education SDG targets will be unattainable “unless rates of

improvement dramatically shift””. See also Lee (2019). 29 The integration of the SDGs into national budgets encompasses several political, financial and technical

issues. A few studies (see e.g. Hege and Brimont, 2018) have made attempts to summarize the

preliminary experience, but they mostly focus on developed or middle-income countries.


Second, and related to the first point, a key question is how the SDGs and the

available funding will impact on policy priorities and allocation decisions in

developing countries. SDGs may– or may not – have raised citizens’ expectations

about achieving the new targets, but most SDGs are not new priorities30, and a

situation with SDG underfunding will necessitate that difficult priorities are made

between sectors or SDGs.

Political settlement perspectives on analyses of such policy decisions in

developing country contexts have gained prominence lately (see e.g. Behuria et al.,

2017). The key argument – also applicable to the SDGs – is that a mixture of

distribution of power and institutional contexts will strongly influence the

outcome of SDG-relevant policy decision, and that this may spell out differently in

different countries and sectors (see e.g. Whitfield et al., 2015). Whether these

political settlement perspectives can also be used to understand the overall

management of the economic policy, including the fiscal policy and the degree to

which financing by debt is an acceptable strategy, is an interesting area for further

analyses.

Analyses show that domestically rooted path dependency is strong. Political

settlement theory predicts that only SDGs with influential domestic constituencies

may attract significant domestic funding (and other resources). Specific SDGs are

pursued if they fit prevailing norms/expectations and if their implementation

helps to strengthen the coalition from which the ruling elite/opposition needs

support in order to maintain/get political power. This proposition holds for both

democratising and authoritarian countries. Political elites in both regime types

will respond to political pressures in favour of specific SDGs. In the real world,

trade-offs will therefore be made between different SDGs, although this is against

the idea of the SDGs being an indivisible package and a reflection of a common

global vision for the future.

Third, how donors will react to the underfunding of the SDGs, especially in LICs,

requires further analysis, including of the political economy of donor behavior,

but the above analysis lead to different suggestions of which the most important

are: (i) Donors could consider the balance between financial support and support

for policy and institutional reform, especially for LICs, because policy and

institutional frameworks and related absorption capacity have attracted less

attention than SDG finance since 2015. This has led to a decrease in support for

these areas – a trend, which is particularly critical for LICs with comparatively

weaker institutional capacity. The low level of international private investments in

these countries has partly been explained by insufficient institutional capacity and

enabling frameworks31; (ii) Donors could encourage the development of specific

financing instruments which may provide incentives for private investments in

LICs based on an understanding of the specific challenges facing LICs32; (iii)

Donors could reverse the trends of a decreasing share of ODA going to LICs; (iv)

Donors could reconsider the sectoral distribution of aid in view of available

30 See Coulibaly, Silwé and Logan (2018) for an overview of citizen priorities in African countries. 31 This discussion was also raised in connection with the MDGs (see e.g. Devarajan, 2015). 32 For a more detailed discussion of various barriers, see UNCDF (2018, chapter 3).


development finance and policy priorities of developing countries; (v) Donors

could get a better understanding of the distributional implications of various

suggested policy measures. This could also comprise potential interlinkages

between different instruments and types of support (see e.g. OECD, 2018b, chapter

3); (vi) In collaboration with partner countries, donors could initiate a discussion

of policies and priorities in view of the available development finance.


CONCLUSIONS

The purpose of this paper is not to present new and revised estimated figures for

the SDG costs or financing in LICs, but to contribute to ongoing discussions on the

realism and potential role of the various cost and financing estimates, and their

policy implications. As documented in the paper, the significant underfinancing of

the SDGs must be seen in a local and international political context, which vary

between individual developing countries and sectors. Although the SDG financing

gap in LICs may sound substantial, it is – according to a recent estimate (Gaspar et

al., 2019) – only a half a percentage point of world GDP in 2030.

Thus, there is a clear need for more focus on the costs and financing of the SDGs in

the poorest developing countries in particular. Without (unlikely) radical change

in available resources, there is an urgent need to rethink the implications of

looming severe underfunding of the SDG package. Despite the ambition of the

SDGs of leaving no one behind there are strong indications that the poorest

developing countries are being left behind. At the same time, support for

institutional and policy reform has declined, which is particularly critical for this

group of countries. Finally, analyses show that private development finance is

targeted at a few sectors with the potential implication that other sectors are even

more underfunded. This leads to four main conclusions.

First, the assumptions related to the estimation of costs and financial resources for

the SDGs in LICs do not to reflect reality. Their specific conditions and challenges

must be better reflected in the cost estimates: the optimism attached to private

sector development finance and blended finance is simply unrealistic. This also

applies to the assumption that the SDG financing structure in LICs can be close to

the present structure in most developed countries. Recent figures on private

finance show that the LICs are not receiving private finance as envisaged. The

important role given to public sector finance in LICs is not realistic either as the

financing needs of the SDGs will lead to a significant increase in public sector

budgets. An indication of this is the increasing debt levels in several LICs.

Second, the policy implications of severe underfunding for the SDG agenda –

especially in LICs – are difficult to predict. These implications are under-

researched and have only partly been dealt with in existing analyses. Little is

therefore known about how various actors, including donor governments and

domestic governments in LICs, will react to a situation with severe underfunding.

Third, an alternative to continuing making international SDG cost and financing

estimates is to focus on national estimates, which should be based on more specific

assumptions related to the individual countries. The development of national

plans has been a recommendation in several analyses (see e.g. United Nations,

2018, p. 1). Whether national plans will have a mobilizing effect remains to be

seen, but such plans may ensure that SDG discussions are based on more realism.

Again, research on this is limited. Little is known about how the SDG vision

actually influences the political and administrative decision-making processes in

poor developing countries.


Fourth, effective development assistance will require that it is carefully managed

in view of the available funding in LICs for the SDGs. Several key suggestions are

presented in this paper, including that donors should clearly distinguish between

different groups of developing countries, revive support for policy and

institutional reforms in LICs, develop specific financing instruments with a view

to incentivizing private investments in LICs, increase the share of ODA going to

LICs, reconsider the sectoral distribution of aid, and finally better understand the

distributional implications of various policy measures.


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